Thursday, May 27, 2010

Rep. Anthony Weiner (D-New York)—a guy I usually find refreshing, in that he's liberal and doesn't particularly try to hide it—writes an op-ed in Politico that argues against what he calls "hype" regarding Social Security's financing problems. His comments reflect concern among many on the left that President Obama's deficit commission may choose to concentrate on Social Security in its efforts to bring some stability to the federal government's long-term finances.

Weiner has one strong point: that Social Security's funding shortfalls aren't the primary cause of long-term federal deficits and so the program itself shouldn't be expected to solve them, particularly if doing so puts at risk the safety net the program provides to the poor, the disabled, and to survivors. I agree with Weiner there.

At the same time, though, Weiner makes a number of dubious assertions about the program and its financing that, if accepted at face value, would lead a reader to understate the program's problems and misunderstand the pros and cons of potential solutions.

I suspect that Weiner may understate the program's financing problems when he says that

Short-term projections of Social Security are also inherently flawed. That's because Social Security is funded through a payroll tax. It brings less money in during recessions—particularly one as pronounced as this current economic crisis. Once the economy begins to recover and people get back to work, revenues are sure to rebound. Then we can put money back into the trust fund surplus—ensuring that Social Security will be there for generations to come.

Does Weiner think that the Congressional Budget Office and Social Security's actuaries don't account for this? They project that, while the program is in deficit today, it will return to small surpluses in several years as the economy recovers, then fall back into deficits as baby boomer retirements drive up benefit costs. I can think of some reasons why these projections might actually be optimistic, but it's hard to call them "inherently flawed."

Weiner also says that

Concerns that the baby boomer generation would push us off a demographic cliff have also been overstated. It is true that when the baby boomers retire, each Social Security beneficiary will be supported by fewer workers than the previous generation. But this doesn't mean the system will go bankrupt. There will still be more than one worker to each beneficiary, and projected earnings are expected to be far higher in the decades to come.

Why it matters that the worker-to-beneficiary ratio will remain over one is a mystery to me. Even the projected decline from 3.3 workers per beneficiary to 2-to-1 implies a huge increase in program costs, as the same benefits will be borne by 2 workers instead of by 3.3 workers. And while, as Weiner points out, those future workers will have higher wages, they will be obligated to fund higher benefits as well.

Finally, Weiner says, "A recent poll found that 77 percent of voters say cutting the growth in Social Security spending should not be the focus of how government approaches deficits." But the very same poll found that a majority of Americans oppose reducing the growth of Medicare benefits as well. And we know that the vast majority of future federal deficits are driven by rising costs for Social Security and Medicare. Unless we're willing to raise taxes to far higher levels than previous Americans have tolerated or to eliminate vast swaths of non-entitlement spending—neither of which Americans seem poised to support—I'm not sure I would take this poll result as definitive.

Social Security is not the sole cause, or even the largest driver, of future federal deficits. But Social Security remains the largest non-defense federal spending program and its costs are projected to rise from a pre-recession level of 11.3 percent of wages to 15.9 percent in 2025, a 41 percent increase. Coupled with financial strains from rising costs in other programs, it makes sense to take Social Security's problems more seriously than it seems Rep. Weiner does.

2 comments:

Weiner is right that "Short-term projections of Social Security are also inherently flawed" even if he oversimplifies it. A look back at 20 years worth of reports shows that boom times are fully capable of significantly outperforming the LC forecast and recessions are fully capable of underperforming HC projections. For whatever reason, the reports do not make an accurate assessment of the volatility. They do not make an realistic assessment of the uncertainty.

I think they try to account for this, but the data show that they fail.

I can't assess their record for the longterm, but why should I believe it it is any better?

There is certainly much room for discussion about how to close the gap (caused by the fact that is more expensive to live longer), but it is going to require phased adjustments, so any now and forever solution contains a fair amount of hype.

In many ways, short-term projections are harder than long-term ones. While I can't predict the weather next week - it might rain, it might not -- I can predict with great confidence that six months from now it will be colder than it is today. The same holds for demographics. And for Social Security, at least, the broad trends matter a lot more than annual fluctuations. So yes, like others the SSA actuaries can't perfectly predict the business cycle. But it's not clear why that ability -- which is very distinct from others -- matters all that much in this context.

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.